Even those prime candidates may get rejected—what to know now!
The scenario goes like this: you have credit cards, you’re using them, you’re responsible, and then you see a new card or loan with terms and rewards you really like. You apply. You’re denied and given a somewhat cryptic response. Here’s a cheat sheet of some of the more confusing responses from credit lending companies.
This term has come to be used somewhat fast and loose, but in its most technical sense, pyramiding debt is when you pay off existing debt with new credit over and over again. At some point, an application will come back denied because the lender sees a trend and decides you actually don’t have the capital to handle the debt.
The term is also being used to identify a trend in applying for credit that lenders find suspicious. For example, say you have $20,000 in credit and are utilizing $10,000. That’s a credit ratio of 50 percent. You know that you should keep your ratio under 30 percent, so you take out another credit card and up your available credit to $40,000, and now your ratio is at 25 percent. But then life happens. You find an amazing deal on a flat screen, have an exciting new job opportunity and need a new suit, and that opportunity is in another state, so you buy a plane ticket and stay in a hotel. Now your using $20,000 and your ratio is back at 50 percent. So, you apply for more credit, and this time you’re denied for pyramiding debt. While you haven’t actually paid of old debt with new (you’re making your payments), the trend your credit is taking doesn’t look promising to lenders.
The Fix: Take it easy on the purchases. Put some capital toward your debt and get your ratio in check that way. Then when you go to apply for credit, lenders will see that you have the income to handle it.
Too Much Open Credit or Too Much Potential Debt
The reverse side of the credit utilization coin is when you have an excessive amount of credit available and a small or modest income. While the term “excessive” is hard to pinpoint, lenders are trying to be cautious about making too much credit available to people with limited resources. However, closing cards may not be the best response if you’ve been denied an auto loan or mortgage for this reason.
The Fix: Talk to your lender about what kind fix they would like to see. They may feel comfortable with you simply paying down some of the debt load you’re currently carrying. Or they may want to see you increase your income if you’re going to continue to carry your current available credit. If you do decide to close cards, remember to close more recently-opened credit since older accounts are more valuable to your credit score.
Insufficient Recent Credit History
Turns out having credit cards and loans may not be enough. They have to be used and active. If your student loan is in deferment or if you haven’t used your current credit cards in six months to a year, a lender may deem your recent credit history to be inconclusive of your ability to pay. Remember, recent credit history is counted more than past history. This can be a good thing if you’re recovering from a dip, but obviously, this can work against you, too.
The Fix: Remember that everyone starts out with no credit, so this isn’t insurmountable. If you have credit or can make payments toward your loan, start doing so. However, if you really need a new credit card, start small and try with local lenders like credit unions or your bank.
Based on the application, there are worsening economic conditions in your area
Well, talk about a one-two punch. You’re denied credit and given a bad financial forecast. In this case, if your credit is solid and your job is solid, the lender may just have excessively high standards for giving out loans based on a scary economic climate.
The Fix: Look around. While lots of credit inquiries will hurt your score, 2 or 3 in a year are considered normal and any dip will be temporary.